Is manufacturing a renaissance in the making?

By Michael Bradwell

Business Editor

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For the past couple of years, economists, business consultants, natural gas production companies and others in business and industry have been heralding a manufacturing renaissance in the United States.

Fueled by an abundance of cheap natural gas and lower labor costs, the thinking is that the U.S. is ripe for a renaissance in making things.

While evidence of a production turnaround exists in a nascent state, experts say a fully evolved renaissance can occur, but also offer some reasons that could hinder or halt its advance.

Recent studies by various national consulting firms credit the development of shale gas and oil production as drivers for a resurgence in U.S. manufacturing.

The McKinsey Global Institute in an August report said that the shale boom, powered by advanced horizontal drilling and hydraulic fracturing, has brought a 50 percent annual increase in oil and gas production since 2007.

According to McKinsey, the shale boom could add as much as $690 billion a year to America’s gross domestic product and create up to 1.7 million jobs across the economy by 2020.

McKinsey’s research found that the impact of shale gas will extend to energy-intensive manufacturing industries and beyond, with the United States having the potential to reduce net energy imports to zero – but only if it can successfully address the associated environmental risks.

A Boston Consulting Group study, also released last month, noted that cheap energy will also boost U.S. competitiveness in several industries. BCG predicts that by 2015, prices for natural gas will be 60 to 70 percent lower, with electricity projected to be 40 to 70 percent cheaper in the U.S. than in Europe and Japan.

Compared with other developed economies, the U.S. is particularly well positioned to increase exports in seven industrial categories, according to the BCG report. In addition to chemicals, machinery and transportation equipment, petroleum and coal products, computer and electronic products, electrical equipment and appliances and primary metals are also seen as export leaders.

An IHS Global Insights report published Sept. 4 picked the U.S. chemical industry to be one of the initial recipients of a manufacturing renaissance.

“The unconventional (shale gas) revolution is contributing to a shift in global competitiveness for the United States by unlocking new production cost advantages,” the report said, which is “particularly pronounced in energy-intensive industries, such as chemicals.” The chemical industry will enjoy a “profound and sustained competitive advantage that is expected to last for decades,” the IHS report stated.

Despite the glowing projections, some believe that while talk of a renaissance has credence, it may take a few years for it to occur.

“It will take several more years for the full impact of improved U.S. competitiveness to translate into significantly more jobs and higher industrial output,” said Michael Zinser, a BCG partner who leads the firm’s manufacturing practice in the Americas and a co-author of the report.

Closer to home, according to a report by the Pittsburgh Regional Alliance for Catalyst Connection, which works with small and mid-sized manufacturers in the region, Pittsburgh ranked 19th among 388 metro areas across the country in total manufacturing businesses.

But a representative of a local manufacturing group said a manufacturing revival hasn’t blossomed yet.

“I haven’t seen a big resurgence yet,” said Ron Davis, president of the 75-member Washington County Manufacturers Association. “If anything, manufacturing is a little slow right now.”

While Davis is aware of the national studies supporting a manufacturing comeback, and believes them to be correct in their projections, he said it will take some time.

“I think it’s going to come,” he said, noting that the recent arrival of compressor-manufacturer Gardner Denver Nash is a good sign.

Davis said a decision by Shell Oil whether to build an ethane cracker plant in Beaver County, expected in January, would definitely create additional manufacturing in the region.

But the biggest challenge for the natural gas industry right now, Davis said, is to finish building the infrastructure that can get the abundant natural gas coming out of the Marcellus Shale to its various market destinations.

With those connections in place, he said, manufacturing should be able to launch a renaissance here and elsewhere across the country.

“It will happen eventually, probably in the next couple or three years,” Davis said.

The need to get more natural gas infrastructure in place, particularly in the Marcellus Shale play, was the focus of a presentation at the Sept. 10 Penn State Natural Gas Utilization Conference in Pittsburgh by Justin Carlson, senior manager for energy analytics company Bentek.

Carlson said Bentek’s research showed that by 2017 – less than four years – the supply of natural gas in the U.S. will outstrip demand.

“This is when the U.S. will become natural gas independent,” said Carlson, who said that despite recent pipeline projects that are now removing bottlenecks in the natural gas supply line in the Marcellus, more needs to be done to move the product to its markets.

It was noted during the conference that of the 6,245 unconventional wells that were drilled by the end of 2012, about half were waiting to be put online.

The beginnings of a manufacturing renaissance are real. Erica Bowman, chief economist for America’s Natural Gas Alliance, told conference attendees there are more than 120 separate projects by American companies to “reshore” manufacturing involving everything form chemicals, aluminium and plastics.

But Bowman agreed with Carlson’s assessment that “there needs to be more demand for natural gas to take away this (vast) supply.”

Despite the abundant supply and the potential for millions of jobs being projected for the manufacturing sector by the end of the decade, at least one of the conference speakers issued a caveat.

Ross Eisenberg, vice president of the National Association of Manufacturers, said the manufacturing revival could be halted if proposed rules by the Environmental Protection Agency go into effect that would curtail natural gas production.